Startup Guide: Business Structures

Businesses are a risk because of the time and money you spend on it. One way to lessen risks of loss is to choose the proper vehicle to run your business, including options like local movers, offering seamless and stress-free relocation services for businesses looking to transition efficiently.

This means deciding whether you need to open it by yourself or with people, or whether you want to go through a more relaxed, or stringent form of registration. 

These decisions boil down to the types of business vehicles: corporations, one person corporations, sole proprietorships, and partnerships.

Each has pros and cons that any business owner should know before choosing which one to avail of. 

If you want an in-depth guide to sole proprietorships and corporations, you can check out our article here.

1. Corporation

Pros: Limited liability, more stockholders means more funding, granted perpetual existence

Cons: Stringent requirements for registration, expensive, you share profits with stockholders

Source: 

A corporation is an entity whereby at least two (2), but not more than fifteen (15) persons called incorporators open a business with a separate juridical personality. 

A corporation may be stock or non-stock.

A stock corporation has stockholders who are entitled to the shares in the profits of the corporation, in proportion to stocks they hold.

A non-stock corporation is not allowed to distribute to their members any of the profits they earn, but the members are entitled to other benefits, such as use of the properties of the corporation.

The benefit to establishing as a corporation is having a separate juridical personality, meaning that the corporation has its own assets and liabilities that are different from the assets and liabilities of its stockholders or members.

As such, when a person tries to claim payment of a debt from a corporation, that person can only claim from the properties of the corporation but not the personal properties of the stockholders or members. This is called the limited liability doctrine. 

The Revised Corporation Code (RCC) grants the corporation perpetual existence. They do not need to renew their registration anymore after a certain period. The death of one incorporator does not terminate the corporation, the incorporators may just have to replace him/her. 

Requirements

A corporation is formed after submission of documents to the Securities and Exchange Commission (SEC). The SEC then issues a Certificate of Incorporation which begins the life of the corporation.

The requirements of a corporation are: 

• At least two (2), but not more than fifteen (15) incorporators, with each one being a stockholder of the corporation

• Articles of Incorporation

• Corporate Name

• Board of directors, trustees, and officers

• Bylaws

• Corporate books and records

You can also read more about Shareholders’ Agreements here.

2. One Person Corporation 

Pros: Limited liability, full control of the business, no minimum capital requirement

Cons: Stringent requirements, expensive, taxed like a corporation

A one person corporation (OPC) is a corporation with a single stockholder. 

Like a corporation, an OPC has the attributes of separate juridical personality and limited liability. Generally, a creditor of the OPC cannot go after the properties of the single stockholder. The creditor can only ask for payment from the assets of the OPC.

The single stockholder of the OPC is simultaneously the sole incorporator, director, and president. This ensures that they have full control over the business.

The OPC, being the sole stockholder, also does not need to share his profits with anyone else.

An OPC also does not have a minimum authorized capital stock requirement. Anyone on any budget can begin an OPC, subject to certification under oath of the financial statements of the corporation in case their assets are less than Php 600,000.

Requirements

An OPC is required to register with the SEC. Their term of life begins after the issuance of a Certificate of Incorporation.

The requirements of a One Person Corporation are:

• Articles of Incorporation

• Bylaws

• The initials “OPC” after its corporate name

• Corporate Officers - 

  • Treasurer

  • Corporate

  • Other officers it may deem necessary

• Nominee and Alternate Nominee

• Minutes Book

• Audited financial statements prepared by an independent certified public accountant, and if the assets of the corporation are less than Php 600,000, the certification must be done under oath by the corporation’s treasurer and president

• Report containing explanations and comments by the President on the auditor’s report

• A disclosure of all self-dealings and related party transactions between the OPC and single stockholder

3. Sole Proprietorship

Pros: Full control over the business, profits are kept to the individual, easier registration process

Cons: Unlimited liability

Source: 

A sole proprietorship is a business vehicle whereby the owner is solely responsible for his business and the liabilities that his business may owe to creditors. 

This is a good option for small businesses who do not need investors and have an income below Php 3 million.

The sole proprietor has full control over his business, and does not need to distribute his profits. There are no stockholders to distribute them to. There are also no members that are entitled to make use of the assets of his business.

However, a sole proprietorship does not have the attributes of a separate juridical personality and limited liability. On the contrary, what they have is unlimited liability.

Unlimited liability means that when a sole proprietor is sued by a creditor of his business, the creditor can claim payment from both the assets from the business and the personal assets of the sole proprietor.

Requirements

A sole proprietor is required to file with the Department of Trade and Industry (DTI), the Bureau of Internal Revenue (BIR), Barangay Hall, and City Hall of their local government units to legitimately operate.

Unlike the registration requirements for corporations and OPCs, registering a sole proprietorship is just a matter of getting business permits and registering as taxpayers.

4. Partnership

Pros: Management of the business can be split, may be formed by a mere agreement

Cons: Dissolves even when just one partner leaves

A partnership is when two or more persons contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves.

A partnership is constituted by two or more persons. This is beneficial because the management of the business can be split. 

An example of a partnership is when professionals like lawyers start firms. Lawyers are not allowed to form corporations, so they form general professional partnerships to practice law.

There is also a chance for more capital because you rely on what the rest of the partners can contribute to the business. This may come in the form of funds, property, or the ideation of the business.

A partnership is built on trust. Each partner must trust that the other is doing things that are in line with their business purpose. 

As easy it is to form a partnership (because generally a written agreement is not required), it is also easy to dissolve. It may dissolve by the decision of the partners or when even just one of the partners leaves the partnership.

Requirements

Generally, a partnership does not require registration with a government agency. Upon the decision of the partners to pool their resources and divide the profits, the partnership is already formed. 

However, a partnership formed to exercise a business will have to register as a business. This means getting the necessary permits and licenses to legitimately operate. 

In the following cases, the partnership should be recorded in a public instrument:

1. When the pooled resources involve immovable property or real rights

2. When the capital exceeds Php 3,000

In the second case, the public instrument must also be recorded with the SEC.

If you would like to learn more about each type of business vehicle and what will best suit your business, talk to a lawyer at digest.ph.

Summary